Analysts Skeptical as Majority Owner Takes Role as Chief Executive of Sears

Just hours after a board discussion on Monday, a note went out to Sears Holdings employees from Edward S. Lampert, the company’s majority owner and chairman, that he would now be its chief executive.

“I believe in our company,” Mr. Lampert wrote.

But not everyone shares his optimism.

Seven years after he engineered the merger of Sears and Kmart, Mr. Lampert’s plans for the company face a new round of skepticism.

On Monday, Sears announced that its chief executive of two years, Louis J. D’Ambrosio, would be stepping aside because of a health issue in his family and that Mr. Lampert would assume the role. Despite the unexpected departure, Sears is not expected to change course.

“The reality is, Eddie’s been running the company the whole time,” said Gary Balter, an analyst at Credit Suisse.

Mr. Lampert once stepped back from day-to-day management, but more recently he has increased involvement in Sears as he has scaled back his influence on other investments. He maintains an office at Sears headquarters in Hoffman Estates, Ill., although he lives on the East Coast.

If employees “wanted to make merchandising decisions, they had to fly up to Connecticut to get approval from Eddie. He was making day-to-day decisions in this company, and clearly he’s making the capital decisions,” Mr. Balter said.

But Mr. Lampert is a money man, not a merchant, and analysts question his plans for reviving Sears, which has faltered since he combined Sears and Kmart. It has valuable assets, they say, but sales and profitability continue to slide. In his most recent chairman’s letter, Mr. Lampert outlined some ways he wanted to take Sears forward, including building on its loyalty program and expanding what he called “integrated” options — allowing shoppers to buy online, in stores, via mobile devices or a combination. He highlighted Sears’s liquidity options and its ownership of and access to cash from Lands’ End, the clothing retailer Sears bought in 2002, and its real estate, “should the circumstances warrant.” He further wrote, “We do not expect to utilize or execute all of these options,” but he said he wanted to reassure vendors.

“If you’re unwilling to try new things, and to fail and learn, you don’t have a shot,” Mr. Lampert said in an interview last year. “That doesn’t mean you’re going to be successful, but you have to try to change.”

Mr. Lampert’s new role as chief executive of a struggling company is a new one for him.

When he was younger, Mr. Lampert made a name for himself with his fast rise through the ranks at Goldman Sachs, his brash courtship of Wall Street idols like Richard Rainwater and Robert Rubin and, when he started his investment fund ESL Investments in 1988, the high returns at the fund. He invested in struggling retailers like AutoNation and AutoZone in the 1990s and early 2000s, then bought a controlling stake in Kmart when it was in bankruptcy. In 2005, he completed the merger with Sears.

And, adding some Hollywood flair to the story line, after being kidnapped at gunpoint from a parking garage in 2003, Mr. Lampert, after being held for about 30 hours, managed to negotiate his own release.

Fortune called the billionaire “the best investor of his generation.” Bloomberg Businessweek asked if he was “The Next Warren Buffett?”

But Sears value has declined since then. His initial idea was to combine the best of Sears and Kmart and sell some appealing locations to competitors. But the recession meant the real estate was no longer in demand, and now many large retailers are downsizing or closing stores.

As the real estate options diminished, Sears was losing sales. The people Mr. Lampert hired to run the company were not retailers, and instead had backgrounds in fast food, supply chains and technology.

Sears’s sales have declined for five straight years, and its market capitalization now is 15 percent of what it was at the beginning of 2006. In the third quarter, the company lost $498 million, up from $410 million for the same quarter in 2011. Sales fell by $548 million, to $8.9 billion.

In the last year, Mr. Lampert has directed a cleanup of the balance sheet. He sold some valuable real estate, spun off business units and reduced inventory to assuage liquidity concerns after a dismal 2011 holiday sales season.

This year, it spun off a profitable hardware retail division and part of its stake in Sears Canada.

In February, the company said it would sell some of its most profitable stores in exchange for cash. General Growth Properties, the mall operator, bought 11 properties for $270 million, including a Sears in a highly profitable high-end mall in Hawaii. The problem, though, is once it gets rid of its best properties, Sears is left with middling stores in lower-traffic locations.

And it is not putting money into stores at the rate that competitors are. Its capital expenditures in 2011, its most recent full fiscal year, were about 1 percent of sales. Wal-Mart, by contrast, spent about 2.5 percent of sales on capital expenditures in its most recent fiscal year and Target spent about 3.5 percent of sales.

Mr. D’Ambrosio made some improvements to stores that analysts applauded. He hired Ron Boire, formerly of Toys “R” Us and Brookstone, to lead merchandising and stores, expanded a loyalty program and equipped clerks with technological tools. And with his arrival, capital expenditures — money spent on store remodeling, among other things — ticked up slightly.

“They’ve underspent for years in terms of keeping their stores fresh and new looking and appealing to consumers, but there were signs of progress in the last few quarters. The margins were getting better, sales were getting better,” said Evan Mann, senior high-yield analyst at Gimme Credit, a bond research service.

Online sales are a bright spot. Those increased 20 percent for Kmart and Sears combined in the nine weeks ended Dec. 29, the company said Monday. And Sears’s apparel business appeared to be benefiting from J. C. Penney’s stumbles, Mr. Mann said. The company said Monday that the apparel category at Sears’s domestic stores is expected to have its sixth consecutive quarter of increases in sales at stores open at least a year.

Still, those figures are overshadowed by over all revenue and profitability declines at Sears.

These days, Mr. Lampert, 50, appears more subdued. Recently, he has largely avoided the press; the company rarely holds conference calls for analysts, a standard practice among retailers. Sears declined to make Mr. D’Ambrosio or Mr. Lampert available for interviews on Tuesday. Last spring, Mr. Lampert moved from Connecticut to Florida, buying a house off Biscayne Bay for a reported $40 million. He still looks for under-the-radar deals, apparently; the house was not on the market.

A version of this article appears in print on January 9, 2013, on page B3 of the New York edition with the headline: Analysts Skeptical as Majority Owner Takes Role as Chief Executive of Sears. Order Reprints|Today's Paper|Subscribe